Adam Smith and the Chicago School

Abstract

Adam Smith's discussion of the system of natural liberty, its effects on the functioning of the market system, and the resultant implications for the economic role of the state has formed the basis of much of the subsequent economic literature analyzing the interplay of market and state. While Smith is shared by virtually all economists, it would be hard to argue that the association of his name with any subset of them would be as strong as that with the Chicago school. There is also no question that the Chicago school has both claimed and evidenced a close affinity with Smith for three-quarters of a century. This essay sets out to examine this most fertile use of Smith and the interpretive dichotomy it evidences. The standard caricature of the Chicago approach is that it seizes on two aspects of Smith's thought - the efficacy of the system of natural liberty and the dim view of the abilities of the state to improve on the outcomes associated with natural liberty - and pushes them to the limit in its elaboration of a model of a competitive market system in which government is an impediment to, rather than a facilitator of, economic efficiency. However, the Chicago school's discussion and use of Smith is not homogeneous, and the differences are reflected in the distinctions one can see between what McCloskey has called the Good Old Chicago School of, e.g., Frank Knight, Jacob Viner, and Ronald Coase and the new Chicago of, e.g., George Stigler, Gary Becker, and Richard Posner. The latter group has given us a Chicago Smith, whose work corresponds rather closely with their own rational choice-based analysis of competitive market structures in an a-institutional context. The former group, in contrast, paints a picture of a Smith who is rooted in the Scottish Enlightenment, one who is a bit harder to pin down and who is more overtly attuned to the import of what Coase has called the institutional structure of production and the role played by government within that structure.